Giants Continue To Topple In The Energy Sector

Following yesterday's historic bankruptcy of Peabody Energy, the world's largest coal miner, the defaults continued hot and heavy overnight when first Energy XXI, which had already warned it would unlikely make its bond payments, filed for a prepack Chapter 11, and then Gulf Keystone announced it would delay a bond payment.

This is what XXI posted overnight to explain its prepackaged bankruptcy:

Energy XXI Ltd (NASDAQ:EXXI) ("Energy XXI" or the "Company") announced today that it and certain of its subsidiaries have entered into a Restructuring Support Agreement (the "RSA") with holders of more than 63 percent of the Company's secured second lien 11.0 percent notes (the "Second Lien Notes") on the material terms of a balance sheet restructuring plan that will strengthen the Company's financial position by reducing long-term debt and enhancing financial flexibility. In order to implement the terms of the RSA, the Company commenced cases under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Southern District of Texas, Houston Division.

Through the Chapter 11 restructuring, Energy XXI will eliminate more than $2.8 billion in debt from its balance sheet, substantially deleverage its capital structure and position the Company for long-term success. The RSA eliminates substantially all of the Company's prepetition funded indebtedness other than its first lien reserve based loan facility, resulting in a significantly deleveraged balance sheet upon the Company's emergence from the Chapter 11 bankruptcy process .The RSA also provides that John Schiller will continue as the reorganized company's Chief Executive Officer and a member of its board of directors. The Company is also continuing ongoing negotiations with a steering committee of lenders under the Company's first lien reserve based loan facility that is not party to the RSA at this time.

Notably, as a result of the deleveraging the pumping will continue: "Energy XXI expects operations to continue as normal throughout the court-supervised financial restructuring process, including paying royalty and surety obligations in the ordinary course. In addition, the Company expects to maintain compliance with its existing long-term plan with the Bureau of Ocean Energy Management throughout the restructuring process."

This means that as we warned many months ago, as companies enter the bankruptcy process, they will maintain their oil production, in what will likely be a setback to Saudi plans to cut out marginal shale producers.

Energy XXI's President and Chief Executive Officer John Schiller said, "Today's announcement reflects the next step in our efforts to respond proactively to the challenging market environment. Over the last several months, we have worked to actively manage our balance sheet, and after thoroughly evaluating our options with the help of our outside advisors, we determined that entering these agreements and implementing them through a court-supervised process is the best course of action for Energy XXI and all our stakeholders. We are confident that we are taking the right steps to provide Energy XXI a solid foundation for a successful future."

Elsewhere, Gulf Keystone Petroleum Ltd. also took its first step to a Chapter 11 filing when it announced it would delay about $26 million of bond payments due next week "as low oil prices and disruptions in Iraq press its finances."

As Bloomberg reports, "the company intends to use grace periods for payments on convertible bonds and guaranteed notes due on April 18, it said in a statement on Thursday. Shares of the London-based oil explorer tumbled as much as 36 percent to record-low 4.5 pence.

Gulf Keystone, which operates in the Kurdish region of northern Iraq, also intends to hold talks about fundraising and debt obligations after oil prices plunged about 60 percent in two years. Financial difficulties have been compounded by previously erratic export payments from the Kurdistan Regional Government.

“We are working to achieve the best possible way to restructure our balance sheet,” Gulf Keystone’s Chief Executive Officer Jon Ferrier said in the statement. “Addressing our funding needs will ensure the company’s longer-term future.”

Payments on $325 million of October 2017 convertible notes can be delayed until May 2, without risk of default. Those on $250 million of guaranteed notes due April 2017 can be postponed until May 3. The convertible notes are quoted at 13 cents on the dollar, while the guaranteed notes are at 49 cents, according to data compiled by Bloomberg.

Bondholders including GLG Partners, Sothic Capital Management and Taconic Capital Advisors have hired Houlihan Lokey Inc. to advise them on the potential debt restructuring, people familiar with the matter said in February.

It is unlikely that these coupon payments will be paid meaning that the ad hoc creditor committee will likewise end up owning the company, which when delivered, will continue pumping even more oil now that its overall cost of capital slides as it has no more debt payments to worry about.